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Is ‘lack of supply’ an illusion?


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Overall I'd say yes, it's an illusion, although the supply is getting pushed a bit by demographic change and massively irresponsible population growth. There are certain locations where it is an issue (generally those where there's no room to build more anyway, e.g. the middle of some cities).

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I'd say no overall. There are downs near me like didcot and Bicester which have massive building programmes doubling the size of the towns. All the houses sold for much more than the existing local hosing stock sometimes by over 30%. I'd say the cost and supply of credit along with sentiment is the driving force. 

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12 hours ago, GreenDevil said:

They do in a free market.

This isn't a free market.

 

Nothing stops an individual from purchasing, abet affordability. The country does not have a supply issue, an affordability issue driven by loose credit institutions, perhaps. 

At the end of the day, low unemployment must be accompanied by inflation busting wage growth... or economic sentiment changes track.

From what I see econimic sentiment has shifted from growing to uncertainty, thats the prelude to  .....

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If have someone thinks the cost of any other asset, shares, gold etc is too high they dont buy and the money stays in their account. With housing the money is still coming out of their account as rent. Vested interests can then ensure monthly rents are equal or higher than mortgage payments by selling off social housing, housing benefit subsidies to landlords, a council tax system where owner occupiers pay the same as renters, ultra low rates. 

 

 

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The main reason prices are high is because vested interests want them to be. If their was so much supply that this threatened to crash prices they would do something about it. Look at john prescotts disgraceful pathfinder scheme, 2 billion spent on compuslory purchase of perfectly good terraced housing in the north of england to be destroyed, just because their was an overabundance of cheap housing that wouldnt let these areas gentrifyy. Further back in history look at enclosure acts or confiscation of common ground to stop individuals being self sufficient so they had to labour in servitude for someone else. 

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1 hour ago, Toast said:

I've seen figures for average number of people per dwelling before, and I think it's a good statistic. I do have two concerns though:

(1) It's a ratio of two numbers. I'm happy that ONS (or whoever) can count dwellings accurately. I'm not so convinced they can count the population correctly. If Spyguy is correct and there is another 3M (or 5%) of the population uncounted, that raises the 2014 ratio from 2.30 to 2.42. Not a huge effect, but it puts us back to 1990's ratios, when there was (if memory serves) quite a lot of homelessness / pressure on supply.

(2) Change in population and family structure. If there are a lot more elderly couples or elderly singletons than previously, then that puts pressure on supply for the younger part of the population. Similarly, if people are marrying and having families later, there will be a need for more houses per head of population in order to meet demand. For sure, strangers can (and do) live in HMO's, but if they don't want to, that doesn't alter the fact that there are too few houses, and thus a lack of supply.

No good population statistics also means no evidence of a housing shortage.  

Either way, my point stands.

Moreover we shouldn't reject the data because the conclusion is pretty insensitive to any error in the numbers.

It's not likely that the population is wrong by as much as 5%, and even if it was, that takes us to housing levels of the 90s when prices were cheap.

On the other hand we already have a simple explanation of what went wrong that is consistent with all the evidence.   

Multiple lines of evidence support the claim that a credit bubble and a surge in landlording led to an increase in prices and a decrease in the number of home owners.

On what basis should we reject this explanation? 

 

 

 

 

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For HPI you need both..

1. conditions of scarcity and therefore competitive bidding

and

2. easy credit

The two go together to create the nightmare we face now...lack of supply is not an illusion.  Those bemoaning increased supply are part of the problem.

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20 minutes ago, Wayward said:

For HPI you need both..

1. conditions of scarcity and therefore competitive bidding

and

2. easy credit

The two go together to create the nightmare we face now...lack of supply is not an illusion.  Those bemoaning increased supply are part of the problem.

The government creates artificial scarcity the moment it imposes a land market. 

That's what a land market is, and that's why it isn't a free market. 

We could have no house building at all, and all that would happen is that this website would have to change its name to landpricrcrash. 

And that's true regardless of planning law.

Edit: and who's beomoaning increased supply?  Not me, certainly. 

Edited by DrBuyToLeech
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In general there is not in my opinion a shortage of housing in the UK, clearly there are issues in London where the concentration of employment in the center means people have to trade housing cost v commuting time/cost. 

Whether we need an increase in supply or not, I can't see it as being anything other than positive for reducing house prices (even if the HTB shoeboxes are absurdly priced)

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7 hours ago, DrBuyToLeech said:

The government creates artificial scarcity the moment it imposes a land market. 

That's what a land market is, and that's why it isn't a free market. 

We could have no house building at all, and all that would happen is that this website would have to change its name to landpricrcrash. 

And that's true regardless of planning law.

Edit: and who's beomoaning increased supply?  Not me, certainly. 

Not understanding what you are trying to say. Vast majority of land can't be built on due to planning restrictions, which creates much of the scarcity and high price.

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5 hours ago, PropertyMania said:

Not understanding what you are trying to say. Vast majority of land can't be built on due to planning restrictions, which creates much of the scarcity and high price.

I think this is not correct.

There is lots of land that can be built on, and the big developers have years and years of supply locked up in their 'strategic landbanks' via various forms of contract. The key point is that the prices at which landowners will sell reflect the prices at which buyers will buy, i.e. current prices. This is the key feedback mechanism which justifies calling the UK house building model speculative. Supply reflects the willingness of developers to believe that prices are going higher. Because the land price is the cost which drives the rest of the process the developers prosper when they can buy land at one price and sell it at another (higher) price.

For as long as this mechanism dominates how supply meets demand you'll have market prices which reflect a market designed to ensure that the greatest possible economic rents flows to landowners. Markets are a great tool, but a tool has no intent; our intent informs how we choose to employ our tools and also explains when and how we choose to refine the rules that inform their use.

Edited by Beary McBearface
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5 hours ago, Beary McBearface said:

I think this is not correct.

There is lots of land that can be built on, and the big developers have years and years of supply locked up in their 'strategic landbanks' via various forms of contract. The key point is that the prices at which landowners will sell reflect the prices at which buyers will buy, i.e. current prices. This is the key feedback mechanism which justifies calling the UK house building model speculative. Supply reflects the willingness of developers to believe that prices are going higher. Because the land price is the cost which drives the rest of the process the developers prosper when they can buy land at one price and sell it at another (higher) price.

If I'm reading what you are saying correctly, then we can hopefully test fairly soon whether this mechanism is the dominant one setting land prices. The test comes when (if) land prices start to fall from their current historically high values. If it's a speculative market, with land hoarders hoping to sell high (but willing to wait for higher highs) then that's what they will do once the trend turns down, and the falls will be spectacular.

Does anyone have insider knowledge on what would constitute a "falling trend" in these hoarders' financial models? One year of declines + negative economic outlook? Something more sophisticated?

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14 hours ago, PropertyMania said:

Not understanding what you are trying to say. Vast majority of land can't be built on due to planning restrictions, which creates much of the scarcity and high price.

No.  Valuable land is inherently scarce because of geometry.

There's only so much space within 30 minutes of work and a school and a shop.  

It's not planning that makes it more expensive to set up a shop on Bond Street, rather than in Macclesfield.

Without planning restrictions valuable land would be a bit less scarce, but probably not as much as you'd think. 

Yes, it might be enough to tip the market, and I am very much in favour of trying, but it isn't the fundamental problem and only distracts from proper understanding of land markets in general.

A free market is a market based on bargaining and voluntary contracts.  'Private - keep out' is a threat of violence, not a contract.  

A land market is never a free market, since it's based on state control of where we live and work.

In reality every land market is already a giant planning restriction, we've just forgotten this because our markets are fairly old.

If you want to see the recent creation of a land market, look at Zimbabwe and Robert Mugabe, who followed exactly the process we went though in the UK and then US (and probably everywhere) when he threw white farmers off their land and gave it to black farmers.  

I mean, say what you like about Mugabe, but he's a fantastic economics teacher. 

Edited by DrBuyToLeech
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41 minutes ago, DrBuyToLeech said:

No.  Valuable land is inherently scarce because of geometry.

There's only so much space within 30 minutes of work and a school and a shop.  

It's not planning that makes it more expensive to set up a shop on Bond Street, rather than in Macclesfield.

Without planning restrictions valuable land would be a bit less scarce, but probably not as much as you'd think. 

Yes, it might be enough to tip the market, and I am very much in favour of trying, but it isn't the fundamental problem and only distracts from proper understanding of land markets in general.

A free market is a market based on bargaining and voluntary contracts.  'Private - keep out' is a threat of violence, not a contract.  

A land market is never a free market, since it's based on state control of where we live and work.

In reality every land market is already a giant planning restriction, we've just forgotten this because our markets are fairly old.

If you want to see the recent creation of a land market, look at Zimbabwe and Robert Mugabe, who followed exactly the process we went though in the UK and then US (and probably everywhere) when he threw white farmers off their land and gave it to black farmers.  

I mean, say what you like about Mugabe, but he's a fantastic economics teacher. 

The geometry isn't fixed. If agricultural land was allowed to be repurposed to build new towns, many more people could live within a few minutes of school, shops etc. If I remember correctly, only around 3% of England's land is residential property. 

Still don't understand the meaning of a 'land market' and the idea that the state controlling where we live..

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9 hours ago, Beary McBearface said:

I think this is not correct.

There is lots of land that can be built on, and the big developers have years and years of supply locked up in their 'strategic landbanks' via various forms of contract. The key point is that the prices at which landowners will sell reflect the prices at which buyers will buy, i.e. current prices. This is the key feedback mechanism which justifies calling the UK house building model speculative. Supply reflects the willingness of developers to believe that prices are going higher. Because the land price is the cost which drives the rest of the process the developers prosper when they can buy land at one price and sell it at another (higher) price.

For as long as this mechanism dominates how supply meets demand you'll have market prices which reflect a market designed to ensure that the greatest possible economic rents flows to landowners. Markets are a great tool, but a tool has no intent; our intent informs how we choose to employ our tools and also explains when and how we choose to refine the rules that inform their use.

If you own a brownfield site, it's a big gamble to deliberately keep it empty and unproductive. You have to be confident the land will rise in value more than the  opportunity cost of not receiving rent from e.g. a block of flats. I'm sceptical that developers are hoarding land just to try and profit from a rise in value - probably more about widening options based on uncertain planning permission outcomes. 

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21 minutes ago, PropertyMania said:

The geometry isn't fixed. If agricultural land was allowed to be repurposed to build new towns, many more people could live within a few minutes of school, shops etc. If I remember correctly, only around 3% of England's land is residential property. 

Still don't understand the meaning of a 'land market' and the idea that the state controlling where we live..

Over a sufficiently long period it isn't fixed.   That's how cities evolved in the first place.

Over a sufficiently long period of time we are dead.

 

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2 hours ago, PropertyMania said:

The geometry isn't fixed. If agricultural land was allowed to be repurposed to build new towns, many more people could live within a few minutes of school, shops etc. If I remember correctly, only around 3% of England's land is residential property.

Aside from wanting to build more (instead of accepting it as a necessary evil) being something that I can't get my head around, it turns my stomach, you're overlooking the vast centralisation pressures. There would be a lot more people living near the shops for example if so many haven't closed, but what we've got is a situation where it's more efficient to build fewer, large shops, which inevitably means fewer people living near (i.e. within walking distance) of them.

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3 hours ago, PropertyMania said:

If you own a brownfield site, it's a big gamble to deliberately keep it empty and unproductive. You have to be confident the land will rise in value more than the  opportunity cost of not receiving rent from e.g. a block of flats. I'm sceptical that developers are hoarding land just to try and profit from a rise in value - probably more about widening options based on uncertain planning permission outcomes. 

I think this argument is interesting because it illuminates how the process actually works. If you have a big brownfield site then only one of the big developers can handle the development project hence you are immediately in a situation where turning the supply of suitable land into the supply of suitable houses is mediated by a big developer and the build out rate is determined by the interests of the big developer (or more precisely its shareholders).

I can think of the three biggest recent development projects in my neck of the woods. One was the site of an old police station (which had been closed for a couple of years), another some old council offices (which had been out of use for years - possibly a decade) and the last is some scrub land by a railway line. In none of these cases was the owner under any pressure to sell to the developers immediately (though in the case of the council offices financial pressure on local government were probably beginning to concentrate minds).

If the seller extracts a price from the developer which reflects current prices then the developer needs to sell at current prices or better or there's no point building. If 'purchase' of the land which moves the land into the developer's strategic land bank is just a modest option fee then should house prices fall the deal will stall. Sure enough in due course were prices to keep falling the option might lapse and the landowner might reach a new agreement but even in a falling market the role of the land prices weighs very heavily on the speculative building model we have in the UK. If your major input cost is land then you're playing with fire trying to build out a large development in a time of falling prices.

I think you are overstating the opportunity costs. All of these sites were useless as they were and it required substantial investment (including building houses on them) to turn them into something that generated income. There's lots of land that could be built on. Some of it will be generating revenue under its present use and can sit in a strategic land bank locked up under some kind of legal contract for decades without being built out. Some of it will generate nothing but carrying costs which, as you suggest, may or may not be offset by capital appreciation. However, even in the case of a landowner who has a big slice of land that they want to sell to a developer, you need a buyer before you can offload it and the buyer needs to build houses on it before the houses are added to supply.

I think there's a reasonable case to be made that this is the 'point' of the Help to Buy abomination. If you accept that the big developers are the only ones who are going to be building then you can see the dwindling of supply post-2008 as this process coming to life.

nh1.png

Source: Citymetric, Here's why counting houses is hard, 10 October 2017

Help to Buy provided buyers who could afford the 2008 prices in 2013, prices that post-2008 reform of mortgage lending had made unaffordable.

Not sure exactly how this plays into my rambling post but I'll slide it in anyway...

 

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Housebuilders have enough in landbanks for nearly half a million units. There is plenty of demand its just without help to buy they wouldnt get the prices they wanted so have layed off building. 

If you want examples of when supply exceeds demand look back to the financial crisis. In ireland they knocked down whole estates of brand new houses. In manchester there were too many city centre newbuild flats. Some were mothballed, others were taken off the market and the developers rented out what they could. Years later when help to buy came in they went back on sale again. 

 

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